Mark Spitznagel is not known for his optimism. Rather, think of him as Wall Street’s worst-case-scenario guy. His hedge fund, Universa Investments, offers investors something like an insurance policy for their stocks: If a black-swan event causes financial markets to crash, his portfolio of investments is designed to skyrocket in value. His investors don’t put everything into Universa, but allocating a few percent of a portfolio into the fund could counterbalance the losses in case things really go sideways. Last time something like that happened — in 2020 when COVID was spreading around the world and markets woke up to the severity of the situation — Spitznagel’s approach worked well, producing returns as high as 4,000 percent while the S&P 500 went into freefall. In general, Universa hedges the market by buying options on stock indices. So when everyone else is doing badly, Spitznagel hopes to do very well. The rest of the time, he fully expects to lose a little bit of money.
With a number of potentially catastrophic scenarios seemingly on the board — from regional wars to debt crises and severe recessions — I was curious about how dire things look to a man who knows a few things about tail risks. Yet when I spoke recently with Spitznagel, who lives much of the time in Miami but operates a regenerative farm in Michigan with a famous herd of goats, he sounded almost bullish, at least for him. While everyone is worried that the Fed’s interest-rate increases will cause a downturn, Spitznagel thinks the central bank will lower rates before things get too bad. War in the Middle East? He’s more worried about what’s happening in D.C. What to do with bitcoin now? Might as well buy it, he says. Of course, he still thinks we are headed for an apocalyptic crash — just not right away. Recently, he walked me through his thinking on the state of the financial markets and the right way for investors to play it.
Since the great financial crisis, we’ve had a pandemic, another banking crisis, a war in Ukraine, and now one in Israel. But we haven’t actually had a bad recession. If you were to pull your radar screen up in front of you right now, what’s on it? What are you watching? What are you thinking about? How do you kind of frame this moment that we’re in?
Well, I think the backdrop to everything that has happened, certainly since the great financial crisis, is constant monetary intervention by central bankers.
Basically, you mean the easy-money policies from the Federal Reserve and other central banks that have largely prevailed since 2008 — low interest rates, quantitative easing, and so on.
It’s easy for us to forget that it oftentimes goes on behind the scenes. But we have been in a very distorted economy, and we are in very distorted markets that have been manipulated by central banks. I have a strong opinion I’ve been expressing for a very long time that the Federal Reserve — and really, global central banks in general — will never be able to back out of what they’ve done over the past 15 years. They’ve gotten us in a place now where there’s no turning back. I have this metaphor I think is perfect, of forest fires and interventions in suppressing wildfires. Wildfires are an important, healthy part of the natural turnover in a forest ecosystem. They are essential. And forest rangers suppress them, thinking that a wildfire is bad. Well, when you suppress it enough, it gets to a point where you can no longer afford to have any fires burn because they would be too big and too intense. And that’s kind of where we are: Previously, recessions or crashes in the markets were a healthy thing, a healthy, natural turnover in our market ecosystem. But now, things have gone so far that I feel like if the Fed were just to sort of give up on what they’re doing and try to let things go back to normal, there’s this real risk that now the fire destroys the entire forest, the entire ecosystem.
I think the Fed can never truly let fires burn again, even though the last year of raising rates was something like a controlled burn. But there’s a limit to how much you can do that when you’re in this sort of tinderbox. I think they’re going to have to do an about-face and begin suppressing again. Right now, they are spinning the story that they’re going to be hawkish and that they care about inflation, but they’re not going to have that luxury when the fire starts burning out of control. So much of this is the Fed just trying to talk its way out of this, but I think they all realize, and we should all realize, that there’s no real good end to any of this.
Where do you think was the moment of no return? You’re saying that by cutting interest rates at various points and through fiscal stimulus since the great financial crisis, the Fed has prevented a worse recession. When could it have let things burn a bit more? When should it have just let a recession happen?
I’m of the opinion that had they done far less than they did in 2008 and ’09, we would be in a better place today. I feel very strongly about that. Yes, there would have been bankruptcies, but bankruptcies are important. Bankruptcy and failure are really the key part of capitalism, what makes it work. And, you know, in many ways we’ve taken away that sort of homeostatic function of capitalism and markets. But it’s not going to be gone; you’re just going to see it impose itself later. That’s really what these terrible crashes are.
So you trace the basic problem to before the pandemic?
We are in the greatest credit bubble of human history. That’s the real problem. It’s entirely because of artificially low interest rates, artificial liquidity in the economy that has really happened in a big way since the great financial crisis. And credit bubbles end. They pop. There’s no way to stop them from popping. Debts need to get paid or they end in default. And of course, the debt burden today is at a level that cannot be repaid. You can just look at total debt as a function of the economy; it’s never been greater. I don’t think there’s really any way to objectively argue against these points. So it’s the greatest credit-market bubble we’ve ever seen. I have no confidence in how it’s going to end or when. I think we’re going to see very, very low interest rates again in the next year or two. Yes, we’re seeing a spike in rates right now. I’m of a strong opinion that they’re going to have to go back down again when we see another crisis that’s pretty much inevitable.
Square this for me: You’re saying the Fed will have to lower interest rates because it can’t afford to let a crash happen. Yet your strategy at Universa is designed to protect against future crashes, so it would be surprising to me to hear you say you don’t think there will be crashes in the future.
They won’t have any choice. The Fed is not going to let the market crash, because the debt construct is such today that it can’t let this credit bubble burst. And Jerome Powell will talk a big game, saying how we gotta get inflation down and how there needs to be some pain, but they don’t mean any of that when it gets to be bad enough that the Fed cannot afford to let the credit bubble burst. Because, back to my metaphor on forest fire, it will destroy the entire forest. So I’m certainly not saying I don’t think there will be a crash. I think there will be a huge crash coming. I don’t know when — it doesn’t seem to be right now. I think right now, the Fed’s on pause mode, and that usually comes with a little bit of a Goldilocks zone. But I absolutely think rates are going to be very, very low again because the Fed’s gonna have to make them very, very low again to stave off what’s coming. They’ve kicked the can, and they’re going to have to continue to do that. At some point, they’re not going to be able to do that anymore, and I don’t even want to think about what that means.
Speaking after the Hamas attacks on Israel, Jamie Dimon said recently that he thinks this is the most dangerous time the world has seen in decades. Do you agree? Or how would you put this moment in context?
This is the most dangerous time in the markets ever. It has nothing to do with what’s going on in the Middle East, though. It has everything to do with what’s going on in Washington, D.C. The Fed has created a tinderbox time bomb and the greatest credit bubble in human history. And I do not think anybody would disagree with what I just said. But it doesn’t mean you shouldn’t be long on the market; it doesn’t mean everybody should be bearish. I would argue that 20 years from now, risk assets — let’s say the S&P 500 — will be higher. If I can do only one trade right now, one 20-year trade, maybe it would be to buy something like the S&P. Investors are probably gonna beat all hedge funds on a 20-year horizon just by buying the S&P — in fact, I can almost guarantee they will. Maybe I buy Berkshire Hathaway if I could own only one stock. I sure as hell wouldn’t be short if I could do only one trade over a 20-year time frame.
Okay, so when thinking in the very long term, don’t sell and maybe buy the S&P. But there could be a crash coming, so maybe it’s not a good time to buy? If you’re a regular investor, do you just wait and see, or what do you do?
It’s an impossible question to answer. But consider what position you can hold such that if the market is down 50 percent, you won’t sell. What’s that position? That’s really the way you want to think about it. Buffett says the same thing: If you can’t willingly take a 50 percent hit, you shouldn’t be doing it. If you have a position on right now such that a big crash is going to squeeze you out of it, then you shouldn’t have it on. The market is going to do what the market is going to do. It’s you who is going to screw yourself. So protect yourself from yourself. Project yourself into environments that are both scary and euphoric. We’re probably going to see both in the next year: two wonderful opportunities for the market to make you do precisely the wrong thing.
So you said this is the biggest credit bubble in human history and you don’t know when it will burst. But do you have a sense of where the weak points are? Are they more on the consumer-credit side or the corporate-credit side?
I feel like we’re splitting hairs. Those are certainly big ones. Sovereign debt’s a big one too. I don’t need to split hairs about that. It’s the everything-credit bubble, and that’s the sad thing. And the people who are most vulnerable are the ones who are going to really get screwed in all this.
Speaking of bubbles, we’ve been covering the Sam Bankman-Fried trial and the blowup of FTX. I just wonder, as we’ve seen crypto rise and fall over the past few years, have you been kind of sitting back and laughing?
No. Crypto is the ultimate risk asset. Bitcoin is just purely a castle in the air. I’ll buy it because I think you’re going to buy it from me — it’s the greater-fool theory in the purest, purest sense. And that’s fine; it’s a great punter’s pure risk asset, and it serves that function. I think it ultimately has very little utility. It’s a good indicator in many ways; it’s not a safe haven, okay? It’s the opposite of a safe haven. It would be a position against which you would need a safe haven. I don’t know that anybody can seriously argue that it is a safe haven. It’s a pure risk asset. I would say the same about a Mickey Mantle card or a Rolex watch. Pure risk asset.
Do you see it as worth shorting or hedging against?
No, certainly not, because the more price becomes untethered to any type of fundamental value, the more it can print any price whatsoever. So I mean, if there were a way to play this with options that weren’t crazy expensive, it would be interesting, but of course, they would be crazy expensive so I just don’t see a play there. Do people ask me to hedge their bitcoin exposures? It’s an impossible thing to do. I mean, there might be a play to just own it. I don’t think it’s done, frankly. But that’s a very speculative statement I just said. If there’s going to be a blow-off, euphoric top to squeeze people out of their bearishness, bitcoin will probably participate in that. So if you force me to do something with bitcoin with a little bit of capital, I’d buy it.
You said this is the most dangerous time ever. Do you see any good news lately?
Recently, sure. The good news is the economy is growing. That’s good news. But it’s a Pyrrhic victory. Almost all the good news with historic Fed intervention or monetary interventionism behind it is a Pyrrhic victory. You take a victory now for suffering later. That’s exactly what monetary interventionism does: It’s giving you something now, and you have to pay for it with a lot of interest later. And of course, that’s what federal debt is too — it’s our grandchildren’s problem.
If you could tell Washington to do something different, do you have a top three?
That’s the unfair thing. I would never have gotten us into this situation in the first place, so don’t ask me to fix it. I have no idea. I’m sorry, I’m just being honest. Look, the only way to get us out of this is to tear the Band-Aid off. You know, it’s cold turkey. But of course, that’s a big, big problem, and I do not think we have the societal temperament for that. So who knows? Who the hell knows? I wish I could give you something, but I can’t give anything. And I don’t think there is anything, frankly. I think it’s a moot point anyway because they’re just going to have to do more and more and more. Powell has been talking a big game the past year or so, but it’s all a big bluff.
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